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Wednesday, 31 October 2012

Radical privatisation of UK highways proposed by thinktank

Could the UK's entire road network be privately owned and operated?

This is what has been proposed by the Institute of Economic Affairs (IEA) in a report authored by Dr Oliver Knipping, president of the Institute for Free Enterprise (a German free-market think tank) and Dr Richard Wellings, deputy editorial director at the IEA and director of the IEA’s transport unit.

It is a radical vision of a UK road system owned and operated by private entities ranging from larger companies that may own sets of highways and regional networks, to smaller rural or urban co-operatives, all offering different pricing approaches ranging from distance to single point tolling, to access passes, to free routes (paid for by property owners). A very decentralised network, which bears little resemblance to the current central and local government controlled system, and is even more dynamic than the energy and telecommunications utility sectors that it is often (negatively) compared with.

The full report is available here. It is well worth a read, not only for those interested in UK transport policy, but those interested in highways reform worldwide. Why? Because it sweeps away many of the assumptions made about the status quo seen in almost every country, and taps a handful of examples of private sector participation in the roads sector that are useful.

The case is for private ownership of the UK road network. Knipping and Wellings make a compelling case that the status quo is sub-optimal, given that congestion costs £20 billion per annum and the network as it stands costs 2,000 deaths and 25,000 serious injuries a year. They also argue that £9.5 billion worth of spending on roads is poorly allocated because it reflects political rather than user preferences. Certainly, it seems odd that new capital projects can proceed when increasing proportions of the network are poorly maintained and shabby (with signage, lining and road surfaces visibly neglected).

They argue these outcomes arise from the inherent incentives around the current governance of the highways system, and believe that commercial and market oriented incentives would produce superior results. one issue cited is that UK transport policy being strongly biased towards expenditure on public transport rather than roads, as is reflected in the deferral of road projects with higher benefit/cost ratio appraisals than approved public transport projects. Furthermore, local authorities have poor incentives to improve network maintenance, in part because they do not benefit from revenue raised from road use (although they do from parking) and the planning system has largely hindered development of the highway network, because it magnifies the views of opponents, compared to those who benefit from the positive externalities of highways.

Certainly the process of getting highways built in the UK is glacial, and due to enormous amounts of consultation and the need for hypersensitivity about environmental and social impacts. Knipping and Wellings believe that private companies needing to respect private property rights as the first principle, would be better placed to compensate landowners and take into account community views being driven by the profit motive, rather than to fit criteria determined by government.

The report notes historic underinvestment in new capital in the roads sector, but highlights the Humber Bridge as an example of poor investment - it being a toll bridge that has had part of its debt written off because the benefits in promoting growth did not eventuate.

What about road pricing?

On the topic of this blog, road pricing, the key point the authors make is that whilst widespread road pricing would be beneficial, this "would not in itself solve the fundamental problems associated with government ownership of roads" because the two key benefits (better use of existing capacity and better direction of future investment decisions) are undermined by pricing being set by politically determined rather than market oriented criteria.

The authors don't proscribe a road pricing approach per se, but see it as being up to the privatised road owners. They say that no single pricing mechanism would exist under a
privatised road structure, it could be highly diverse and dynamic, and should
be. The full range of options could exist, from time/distance/place based charging, to tolling with manual toll booths on quieter rural routes, to access passes (like vignettes) for networks. In all cases, it would be about comparing revenues, to yield, to asset management and the transaction costs of different charging options.

The authors claims prices would be market set, with the key being competition from alternatives. The obvious alternatives of mode and not travelling are part of this, but also what matters is how privatisation is implemented to encourage competition between roads.

How could privatisation promote competition and so pressure on road prices?

The authors propose that:

"a denationalisation of the road industry should aim
initially at creating smaller-sized lots of road networks than privatising the state monopoly in a single
chunk, which would create a dominant position in the road market. Smaller sizes
– whether area-based or route-based – would facilitate consolidation or
deconsolidation moves in the road industry and shape something like an
efficient market structure, save for the unavoidable inefficiencies and
distortions that had been created by previous state monopoly."

In other words, the Highways Agency might be broken up into multiple regional or route based entities, and perhaps local authority networks could stand alone on their own right, or be broken up as well. Whatever would happen ends up being dynamic, and would see a progressive transformation (probably some consolidation for economies of scale, subject to competition regulation concerns) to see a range of road companies emerging.

The big question is how competitive they may be. Area based road owners would be less likely to offer choices for specific routes (and of course for local trips, such choices may be unlikely to exist), whereas corridor based ones could do. However, at present there is no competition, and the government levies 6p per mile on the average car doing an average trip, through fuel tax.

For local roads, models are suggested such as the Swedish Road Association model which effectively creates co-operatives for rural roads, to property owners operating in their own co-operatives for urban local roads. In addition, in many cases there are rights of way that exist over roads, based on historic property development and ownership. Such rights of access are assumed to remain, but road owners that wanted to override them could do so with the consent of the rights' owners, who may be presumed to want compensation for the loss of the rights.

What about externalities?

A key point is that better pricing resulting from market related decisions should see lower congestion and consequential emissions, but beyond that private owners would have to negotiate with
property owners and communities regarding any new construction, and would be
well incentivised to manage negative externalities. They also respond that there are positive externalities to the presence
of roads that are often ignored, such as the network effects of a road
providing universal access. Fundamentally, it is thought that a property rights approach combined with more efficient pricing could result in better overall results for the environment, even though road owners will want to incentivise the greatest efficient use of their networks.

How would road taxes be reformed?

The authors have a radical proposal. Once all roads are privatised, they would empower the new owners to price road users as they saw fit, but abolish Vehicle Excise Duty (the tax on ownership) and cut Fuel Excise Duty by three-quarters from 59p/l to 15p/l. The new owners would be paying for the roads from road user charges, so government spending on roads would cease. However, this cut in motoring taxes would reduce revenue by far more than what is spent on roads. The rest would be made up by the predicted windfall of £150 billion from selling the network, which could be used to cut public debt (and resulting interest) or simply to offset the loss of revenue until the economic benefits of better pricing and a more dynamic highways sector flowed into the wider economy. It is clear that this proposal implies government spending restraint more widely. One of the longer term effects is seen to be that subsidies for rail can be phased out, primarily because if roads are priced efficiently, the case for subsidising rail is difficult to sustain on pure economic efficiency grounds.

Conclusion

This is a radical set of proposals to shift the UK highway sector into the private sector, well beyond the commonly referred to "public-private partnerships" and beyond what the Government has proposed (which appears to be encouraging more private participation, not abandoning public provision).

The most interesting and useful dimensions to the report are the economics, and considering that to release the full potential of road pricing, it needs to be dynamic and to be supplying market signals not only to users, but to providers of roads. The report also intelligently responds to many of the concerns raised by those who would instinctively oppose privatising roads. I find it refreshing, and a very helpful contribution to the debate, although perhaps what was needed a little more of was the right transition path to take to generate some of the benefits and build confidence in a private model. The other issue is that there is discussion of options for privatisation that effectively mean granting ownership to new user or property ownership co-operatives, which of course would not generate any money for the state or local authorities. It is highly unlikely politicians will swallow an end to so much revenue so quickly unless they could sell the roads. In the current climate, it is also highly unlikely that sufficient investors would be found to buy the whole network.

Yet, the potential is there for the Highways Agency's network, which could be privatised, but would need to be accompanied by a cut in some motoring taxation (e.g. cutting Vehicle Excise Duty to an administrative fee, or reducing fuel excise across the board) to enable the new owners to toll with less public opposition.

For those interested in road pricing, it does help to change the terms of the debate. For over a decade, transport economists and public officials have been trying to convince the public, the media and politicians of the merits of introducing road pricing in the UK. Perhaps the key is to remove such decisions from political/bureaucratic structures and shift them to the private sector. Then the debate will be only slightly less about what people pay, but will also be a little more about what they get for their money.

Footnote

The Institute of Economic Affairs (IEA) describes itself as:

the UK's original free-market think-tank, founded in 1955. Our mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

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What is road pricing?

Road pricing is any system that directly charges motorists for the use of a road or network of roads. Traditionally it has meant tolls on single routes, particularly crossings such as bridges or tunnels. More recently it also includes area, cordon and zone pricing of urban areas, and distance and time based charging of whole networks. It does not include fuel or tyre taxes, or taxes on ownership or purchase of road vehicles.